What is a DMP?A debt management plan (DMP) is a repayment arrangement between you and your creditors covering non-priority debts such as credit and/or store cards, loans, overdrafts and other agreements such as mobile phone contracts.
All DMP providers must be authorised by the Financial Conduct Authority, the financial regulator, to ensure they meet agreed standards.
Calculating your DMP paymentsPaying your rent or mortgage is a priority because of the severe consequences which can arise if you fail to pay each month. Because of this, these payments are included as part of your outgoings before your DMP is calculated.
Secured debts such as mortgage arrears or other loans cannot be added to a DMP, nor can child support, student loans or county court judgments (CCJs) and fines.
If you have a DMP, this may negatively affect your credit rating and make it difficult for you to get a standard mortgage. Investigating specialist DMP mortgages is likely to be the best way to find out if you can get on the property ladder.
Seek helpIf you are considering a DMP, contact debt advice organisations for help as they are not suitable for everyone. DMPs can be altered to suit your circumstances if your living costs or income change.
How does a DMP affect your credit score?Having a DMP will invariably affect your credit score negatively. While DMP repayments aren’t specifically noted on your credit file, accounts in your DMP can have markers added which reveal that repayments are being processed through a DMP.
Your credit file will also show if you are paying less than the minimum repayment you agreed on when you first took on the debts. Your creditors will generally mark your credit file each time you miss a DMP payment. Such notes will last for six years. In the event of a default, details will be added to your credit history for the same amount of time. In England and Wales CCJs (or a decree in Scotland) can be lodged by creditors if you have missed payments and these are also added to your file for six years. Some debts are termed ‘AP’ which stands for Arrangement to Pay.
Be open with your lenderSo can you get a mortgage after a debt management plan? You will need to find a lender who specialises in debt management plan mortgages.
Be honest when making mortgage applications. Even if a debt doesn’t show up on your credit file, the creditor can take you to court with a CCJ. You will probably be asked about debts when making your mortgage application - be upfront about your situation. If the lender asks to see bank statements, your debt payments will show up.
Getting a mortgage with a poor credit ratingIf you have a credit rating that has suffered as a result of a DMP, you will be wondering how this affects your chances of getting a mortgage. A low credit rating does not make this impossible, but you will need the advice of a specialist lender and the best deals may not be available to you since you are seen as more of a risk. Lenders will be more likely to turn down your application or charge you higher rates of interest.
How to improve your credit scoreThere are various ways in which you can improve your credit score, such as regularly checking your credit report, which enables you to amend any inaccuracies. Being present on the electoral roll helps lenders to verify your personal details, while paying bills such as electricity, gas and mobile telephones on time will appear positively on your report.
Reducing your debtThe best position to be in when buying a house is to have no debt. If you can finish your DMP, you will have wiped the slate clean of monthly repayments. When your DMP is finished, you will be in a far stronger position to take on a mortgage. However some negative details may remain on your credit history, but remember that your credit rating will not be the same forever and there is a six-year maximum period for negative records. That said, some lenders will ask whether you have ever had a DMP.
Putting down a depositWhilst the 100 per cent mortgages available in the past may have meant that you didn’t have to put down any money upfront, today, you’ll need a deposit - which may be difficult if you are in debt. In general terms, a wider selection of mortgages become available to you, the bigger the sum you have as a deposit.
If you have a credit score showing a CCJ or default, you are very likely to need a minimum deposit of at least 15 per cent of the property’s total value.
If you take out a mortgage with DMP, take professional advice to determine whether it is better to pay off more of your debts before buying a home, or to use your lump sum to secure a suitable mortgage arrangement.
RemortgagingRemortgaging means that you replace your existing mortgage with a new one. It is more difficult to remortgage with DMP, but not impossible.
If you are a homeowner with a mortgage already, you may be able to take out a new product if your provider allows for a borrowing review. As with getting a first time mortgage with DMP, taking expert advice is paramount.
When your mortgage deal ends, your current lender will typically offer their standard variable rate (SVR). This is unlikely to be the best deal, but it will allow your mortgage to continue with your current lender.
Calculating a remortgageWhen the lender is deciding whether to offer you DMP mortgages, negative information recorded in your credit file will be noted, while the equity in your property and your income will also be taken into consideration.
Borrowing to reduce debtYou may want to remortgage during your DMP to cut down on your monthly mortgage payments or release some funds. In some cases, it may be possible to restructure or clear some of your current borrowing by releasing funds through a remortgage in order to decrease your monthly payments.
Provided that you maintain your debt payments and your mortgage and that other key criteria are met, your DMP should not prevent you from owning your own home.